Diet Coke beats Pepsi in key cola battle

In a historic shift for the beverage industry, Pepsi, long the No. 2 carbonated soft drink in the country, has fallen to third place in the category behind both Coke and Diet Coke. Beverage Digest reported Thursday that Pepsi lost 0.4 share in 2010, falling to a 9.5% share of the category. Diet Coke controls a 9.9% share of the market, while brand Coke holds a 17% share. The move has been long been in the making—Pepsi barely nudged by Diet Coke in 2009—but the brand wasn't able to turn the tide. John Sicher, editor and publisher of Beverage Digest, said Pepsi had held the No. 2 slot for decades.

The shift calls into question Pepsi's well-watched and ambitious Refresh Project strategy. The program, which launched in early 2010, saw the brand focus on doling out $20 million in grants to consumers, rather than run its traditional celeb-studded marketing campaigns. That year, the brand also bypassed the Super Bowl, not running ads for the first time in 23 years. (During this year's Super Bowl, PepsiCo pitched its Pepsi Max brand.) Coke, by contrast, has advertised during the last five Super Bowls, after a nine-year hiatus.

"In the cola wars, the Refresh Project by itself isn't enough to market Pepsi's cola brands," said Mr. Sicher. "They need, in addition, more product-oriented advertising and marketing. I think that the 2010 results are probably a wake-up call for Pepsi."

Pepsi has maintained that Refresh Project has been a success, particularly on the local level. And it's expanding the program this year, with tweaks in the U.S. and launches in additional countries. But there has been little to show what impact, if any, the program was having on the bottom line, until now.

"[Refresh Project] has provided an unbelievable response," said Joe Jacuzzi, a Pepsi spokesman. "The fact of the matter is it's a long-term play."

Mr. Jacuzzi added that the company would be ramping up ad spending across its beverage portfolio by 30% this year. That will include new ads for Pepsi, Diet Pepsi and Gatorade. The company is also sinking $60 million into its sponsorship and integration with X Factor, the Simon Cowell-created music competition that is meant to compete with American Idol, which is sponsored by Coke.

"I don't think that we'd view this as a blow," Mr. Jacuzzi said, of Pepsi sliding to the No. 3 slot. "We're looking at our total position. Consumers want a wide range of products for a wide range of occasions. And we're in a great position to satisfy them with that. Today we're fighting a totally different battle on a much bigger battlefield than just colas, though we are completely committed to carbonated soft drinks."

Even so, its fallback marks another turning point in a battle so legendary that, in 1986, then-Pepsi Chief Executive Roger Enrico penned a book titled The Other Guy Blinked: How Pepsi Won the Cola Wars. The question now is whether the "other" other guy blinked.

Crain’s New York Business is the trusted voice of the New York business community—connecting businesses across the five boroughs by providing analysis and opinion on how to navigate New York’s complex business and political landscape.